An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Xia Chen
Univerisity of British Columbia

Jarrad Harford
University of Washington

Kai Li
University of British Columbia

Abstract: Within a cost-benefit framework, we hypothesize that long-term independent institutions will specialize in monitoring and influencing efforts rather than trading. Other institutions will not monitor. Using acquisition decisions to reveal monitoring, we show that only concentrated holdings by long-term independent institutions are related to bid quality. Further, the presence of these institutions makes withdrawal of bad bids more likely. These institutions make long-term portfolio adjustments rather than trading for short-term gain and only sell in advance of very bad outcomes. We conclude that long-term independent institutions actively monitor and benefit from their efforts. This benefit has both private and shared components. Examining total institutional holdings or even concentrated holdings by other types of institutions masks important variation in the subset of monitoring institutions.

Back to Session Listing

AAA Home Page